DPECO 2025 Kohler Report Week 4 (13/2-20/2)

On Thursday 13 February, Daniel Ziffer observed that the stock market is "not the economy, merely an indicator." Which of the following best explains this statement in economic terms?

• The stock market directly determines economic output and employment levels.

• Stock prices reflect investor expectations, which may not align with real economic conditions such as inflation and cost of living.

• Rising stock prices guarantee an increase in consumer purchasing power and economic growth.

• The stock market has no relationship with the real economy and operates independently of economic conditions.

Inflation in the U.S. "lifted again" after the Federal Reserve had started cutting interest rates. What is the most likely explanation for this outcome?

• Lower interest rates reduce borrowing and increase savings, leading to lower demand and lower inflation.

• Lower interest rates increase borrowing and spending, which can drive inflation back up.

• Higher interest rates always result in higher inflation due to increased costs for businesses.

• Interest rates have no impact on inflation in the long run.

Australians are "spending more on insurance and motor vehicles" but reducing spending on "household goods and going out." What does this suggest about consumer behavior during periods of high inflation and interest rates?

• Consumers prioritize discretionary spending over essential goods and services.

• Consumers adjust spending patterns by cutting back on non-essential items to afford necessities.

• Increased household spending always leads to higher economic growth.

• High inflation and interest rates encourage consumers to increase borrowing and spending.

Australians incomes are being negatively impacted by inflation and interest rates. As a result Australians are "spending more on insurance and motor vehicles" but reducing spending on "household goods and going out." Based on this, what do you think is the income elasticity of demand (YED) of these products?

• Insurance and Motor Vehicles YED > 0 but < 1

• Insurance and Motor Vehicles YED < 0

• Household goods and going out, YED > 1

• Household goods and going out YED < 1 but > 0

US is considering "custom tariffs for different countries" and that this will "shake up exporters like Australia." What is the most likely impact of higher US tariffs on Australian exports?

• Increased Australian exports to the US due to higher demand.

• Reduced competitiveness of Australian exports in the US market, potentially lowering demand.

• A stronger Australian dollar as a direct result of tariffs on Australian goods.

• No impact on Australian trade, as tariffs only affect domestic markets.

On February 14, Daniel Ziffer shared that "about half the flowers sold in Australia are grown here" and that Australia accounts for "less than 1% of the world's export trade in cut flowers." What is the most likely reason for Australia's low share in global flower exports?

• A lack of demand for Australian flowers in international markets.

• Government restrictions on flower exports to protect domestic producers.

• Australian consumers prefer imported flowers over locally grown ones.

• High production costs, water availability issues, and Australia's distance from major markets.

The Australian dollar has risen "3.5% this month," with half of the increase due to the US dollar falling. Which of the following best explains how a falling US dollar contributes to a rising Australian dollar?

• A weaker US dollar makes the Australian dollar more attractive to investors, increasing demand for it.

• The Reserve Bank of Australia (RBA) directly adjusts the exchange rate to counteract changes in the US dollar.

• The Australian government increases interest rates whenever the US dollar weakens.

• A weaker US dollar causes Australian exports to fall, strengthening the Australian dollar.

On Monday 17 Feb, Alan Kohler suggested that there was expectations that the Reserve Bank of Australia (RBA) might not cut interest rates "tomorrow after all." If the RBA decides to keep rates unchanged instead of cutting them, what is the most likely short-term impact on the Australian dollar?

• The Australian dollar would likely weaken, as investors expect lower returns.

• The Australian dollar would likely strengthen, as higher interest rates make it more attractive to investors.

• There would be no impact on the Australian dollar, as interest rates do not affect exchange rates.

• The Australian dollar would depreciate, as higher interest rates lead to more borrowing.

"Cocoa prices have tripled since the start of 2023". As a result chocolate makers are "using less and less cocoa in their products" to maintain profits. Which economic concept does this best illustrate?

• Price elasticity of demand, as consumers will buy more chocolate even if cocoa prices rise.

• Cost-push inflation, as rising input costs force producers to increase prices or alter production methods.

• Demand-pull inflation, as an increase in chocolate demand raises cocoa prices.

• Law of diminishing returns, as adding more cocoa leads to lower productivity.

The RBA cash rate has remained at 4.35% for 468 days, much longer than the average peak duration of 130 days. Based on economic theory, why might the RBA hold interest rates at a high level for an extended period?

• To stimulate economic growth by encouraging borrowing and investment.

• To keep inflation within the target range by discouraging excessive spending.

• To increase unemployment and reduce economic activity permanently.

• To strengthen the Australian dollar by making exports more expensive.